How Do I Deduct Car or Truck Expenses?
If you are using your vehicle in a side business, or as an employee in your employer's business, you generally use one of two different methods of calculating and deducting the expenses involved.
* Note: that both methods require that you be able to document, in writing,
both your BUSINESS mileage and your TOTAL mileage on the vehicle for the year.
Business mileage does not include commuting from home to your main place of
business, and your expenses do not include parking at that location, which is
also non-deductible. If you work out of your home, your mileage to other locations
will be deductible only if you meet the criteria under current law to claim
a deduction for business use of your home (This changed for 1999 and later years.
See the separate FAQ on this subject. Note that whether
you actually CLAIM such a deduction isn't the criteria, just that you qualify
to do so.)
If you elect to use the "Actual Expense" method of deducting expenses, you must keep track of your actual expenditures for gas, oil, insurance, repairs, maintenance, car washes, auto club, and car license plate renewal fees. If you lease your car, it also includes all car lease payments for the year*. If you own your car, it also includes the depreciation allowed on the vehicle for the year*. Interest on a car loan is also deductible, but NOT if you are using the car as an employee. The sum of these expenses is multiplied by the percentage of business use, that is, the ratio of your business mileage to your total mileage.
* NOTE: Special regulations restrict the deduction of depreciation or lease
payments on "luxury" cars that have a value over an arbitrary amount. See Publication
463 for the lease inclusion table for such leased vehicles, and for depreciation
limits on owned vehicles. For business vehicles placed in service in 2003, the
depreciation - before proration by business use - cannot exceed $3,060.
The second method of deducting auto expenses is the "Standard Mileage Rate" method. This method is not permitted if you (1) use someone else's car (other than a car leased in your name), (2) if you use more than two cars at the same time for business, OR (3) if the cars are used for hire, such as in a rental fleet or taxi service. Under the standard mileage rate method, you are allowed an arbitrary amount mandated by the IRS (See below) for each business mile you drive. This is in lieu of all other expenses, EXCEPT: you can deduct the actual costs for business tolls and parking, and you can deduct the business percentage of personal property taxes and (unless you are an employee) car loan interest paid during the year.
Click Here for Standard Mileage Rates for Business.
Generally, if you elect to use one of these methods in the first year you place the car in service, you use that method for the life of the vehicle. If you need to change methods, see the instructions and limitations detailed in Publication 463.